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Is Infinera Corporation a Buy?

By Nicholas Rossolillo – May 22, 2018 at 7:07AM

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For volatile technology parts suppliers, it's all about the future. Ininera's is fraught with question marks.

After underperforming the broader stock market in 2017, shares of Infinera (INFN -5.50%) have rebounded as of late on improving fundamentals. Management was upbeat about its outlook for business, but before piling in, there are some risks investors should be aware of.

What just happened?

Infinera's first-quarter revenue increased 15.5% from a year ago. That resulted in operating margin improving to -12.2% from -36% in the same period in 2017. The loss per share of $0.17 was also a big difference from the $0.50 loss in the first quarter of 2017.

For its second quarter, management sees revenue improving anywhere from 15% to 20% over last year's sluggish pace. The bottom-line loss is also expected to narrow to $0.18, plus or minus $0.02, compared with a $0.29 loss. The one-year forward price-to-earnings ratio based on estimates currently sits at 43.5, implying profitability is in the near future. It looks like a positive trend is emerging, but hold the phone.

The back of a modem with a yellow internet cable plugged into it.

Image source: Getty Images.

The future looks like a bumpy road

It's true that Infinera has seen a recent uptick in spending for high-speed internet infrastructure build-out and has been winning new customers with its recent product lineup refresh. The company's open architecture allows internet network operators to test Infinera's product with its current hardware, opening up the opportunity for quicker design wins.

The expansion of high-speed internet service around the globe that can handle on-demand services (think Netflix and online multiplayer video games as examples) is also a strong tailwind for growth. Fiber deep -- building fiber cable lines closer to end users at home and business -- is also an emerging trend as consumer's expectations from their internet connection increase. Our case study plays a crucial role in providing the building blocks to make all of that possible.

As with all technology parts suppliers, though, internet infrastructure build-out is cyclical. It ebbs and flows, and it's hard to predict sales more than a few months out. On its last earnings call, Infinera acknowledged it is having an especially difficult time forecasting demand for its wares for the back half of 2018. Such issues were what caused investors fits over summer 2017 when sales suddenly dried up.

INFN Revenue (TTM) Chart

Data by YCharts.

In addition to that, the company also does substantial business in Europe. There has been speculation over internet service provider mergers that could impact new infrastructure build-out. And, amid last year's slowdown for fiber suppliers, some of Infinera's competitors have gotten aggressive on pricing. That also creates some uncertainty surrounding revenue trajectory, not to mention the already non-existent profit margin.

Of course, I could be wrong. High-speed internet is expanding, and it needs new lines to travel on. That tailwind alone could help push Infinera's stock higher over time, although its noteworthy that faster internet hasn't translated to profitable growth as of yet. Thus, at this point in time, I'm not a buyer. The company is in a hole, product sales come in fits-and-starts, and there are ample competitors more than willing to undercut prices. Given that, Infinera's stock looks like it faces a bumpy road I'm not interested in traveling on.

Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Infinera. The Motley Fool has a disclosure policy.

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